Lantronix, Inc. (NASDAQ:LTRX) Shares May Have Slumped 30% But Getting In Cheap Is Still Unlikely

Lantronix, Inc. (NASDAQ:LTRX) shareholders won't be pleased to see that the share price has had a very rough month, dropping 30% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 43% in that time.

In spite of the heavy fall in price, there still wouldn't be many who think Lantronix's price-to-sales (or "P/S") ratio of 0.7x is worth a mention when the median P/S in the United States' Communications industry is similar at about 1.1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Lantronix

What Does Lantronix's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Lantronix has been doing relatively well. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Want the full picture on analyst estimates for the company? Then our free report on Lantronix will help you uncover what's on the horizon.

How Is Lantronix's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Lantronix's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 22% last year. The latest three year period has also seen an excellent 97% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 6.5% per year as estimated by the five analysts watching the company. With the industry predicted to deliver 10% growth each year, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Lantronix's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Lantronix's P/S

Following Lantronix's share price tumble, its P/S is just clinging on to the industry median P/S. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look at the analysts forecasts of Lantronix's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Lantronix is showing 2 warning signs in our investment analysis, you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.